Over the past year, a lot of investors have figured out for the first time whether they have what it takes to invest well. If you're not so sure you've got the nerve to be a stock investor, don't give up -- but do step back and take some time to reflect.
If you've had money in the stock market over the last year and you're not freaking out right now, either you have nerves of steel, or you've been locked in a cave since 2007. In times like this, it's perfectly normal to feel like a mess, especially when you've seen half or more of your portfolio go up in smoke.
The question, though, is whether that gut instinct that's pushing you to stop investing is just a typical response to fear -- or whether there's something more to it. Here are a few ways you can tell whether individual stocks might not be right for you.
1. You don't handle huge moves well.
Stock investors fairly often see one or more of their holdings either blow through the roof or plummet into the cellar. For instance, Schering-Plough
In contrast, mutual fund investors rarely see big drops. Even if one of a fund's holdings suffers a setback, it typically represents such a small part of the fund's overall portfolio that it doesn't faze shareholders.
No matter how much you research a company, you can't anticipate every piece of news. All you can do is prepare yourself for what may come -- and know in advance what you'll do if bad news strikes.
2. You don't have time to learn about companies.
Given how easy it is to buy stocks, you may fall into the trap of thinking that you can just go out and buy shares of whatever company you happen to hear about. Pointing to simple maxims like Peter Lynch's "buy what you know" philosophy, you might consider yourself an expert on a company just because you walk into its stores every week on the way to work.
Unfortunately, that's a recipe for disaster. For instance, there's a lot more behind what makes a company like Yum! Brands
Similarly, the experience you have may be completely different from what the overall company is going through. For instance, there's a Starbucks
Now, you don't have to become an expert in nanotechnology or retail marketing in order to make an informed judgment on companies in those industries. But some familiarity and access to information about the stocks you own is a bare minimum. If you just don't have the time, do yourself a favor and hire a money manager who does.
3. You're obsessed about every move.
On the other hand, some people spend way too much time looking at their stocks. Whether by fixating on every penny's move on a tick-by-tick stock chart, or scouring the Internet for any piece of trivial information about a particular company, you may have a compulsive need to think about your investments all the time.
Of course, that could mean that you're in the wrong career; you might make a perfect stock analyst. But if investing is getting in the way of the rest of your life, you may feel more comfortable getting out of individual stocks, relying instead on the simplicity of fund investing to balance your life.
You can always go back
Fortunately, you can still get the benefits of stock investing without all the hassle that comes with it. You can put your money into a broad-market index fund like the SPDR Trust
If that turns out to be a better option, great. But if you get your fears under control, then jump back into the world of individual stocks. Either way, you can reach your financial goals.
More on investing in any market:
- Is the next Great Depression upon us?
- Who's buying stocks now? The Oracle of Omaha, that's who.
- You should buy the cheapest stocks around.